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Monday, August 24, 2009

“Nothing is More Important than Family”

The title of this post is how an ad I received for life insurance starts. This line seems intended to exploit the fact that older people have a desire to leave money for their children and grandchildren when they die. This is an admirable goal, but the particular type of life insurance offered isn’t a good way for most of us to leave money for family.

The ad goes on to explain that if you’re between 40 and 75 years old, “you cannot be turned down for any reason,” and “there’s no medical exam – and no health questions.” Wow! You’d think that everyone with a terminal illness would be lining up for this deal.

The ad contains no hint of any kind of restrictions, but the web site of the bank offering this insurance has additional information. It turns out that if you die in the first two years, your estate doesn’t get the coverage amount. Instead, your estate gets an amount that is calculated based on how much you’ve paid in premiums.

If you’re closer to the 75-year old end of the scale, two years worth of premium payments turns out to be a significant fraction of the coverage amount. So, either your family won’t collect the coverage amount, or you’ll have to pay a significant fraction of the coverage amount to maintain coverage.

It’s possible that some people are in a situation where this coverage makes sense, but it’s hard to believe that it’s sensible for very many of us. Make sure you understand what you’re buying if your life insurance doesn’t require a medical exam or any health questions.